529 College Savings Plans in Minnesota

Quick details:

  • $15,000 annual contribution limit
  • Anyone can contribute
  • Significant tax benefits for contributors under certain income thresholds
  • Growth on the assets aren’t taxed until withdrawal, and if used for education expenses, they aren’t taxed at all (both federal and MN income taxes)

Annual Value:  $1,000

Saving for college for the kids.  I don’t see how we wouldn’t do this, assuming that they will want to go to some sort of school.  It’s not perfect, but I’m wondering if this is a way to just be able to leave them something in general, even in the case that they don’t go to school

I’ve got a fairly complex idea around how to take full advantage of this program, with the short of it being to combine some gift limits along with maximizing the benefits to donors specifically in Minnesota to get a huge boost to our kid’s college fund.  I talked to a CPA and it sounded like this was totally above board as a strategy.

First, some assumptions on how I understand Federal and Minnesota tax code:

  • Anyone can contribute to my kids’ fund.
  • For incomes below a certain threshold, there are significant tax advantages.
    • In Minnesota, you can get a 50% credit for donations on your state taxes (with a maximum of $500 as a credit each year).
    • You could turn around and deposit that money the following year in to the same plan.
    • When done this way, it’s essentially like employer-matching 401(k) benefits – free money.
  • There are gift limits that an individual can receive, but to be honest, we’re so far below that kind of money that it’s not worth mentioning other than that yes, we are allowed to gift money to folks.

So here is my thinking:

  • Let’s say that the grandparents all make under the income limit in 2018.
  • We could give them each $1,000 in December 2018 as a gift
  • They could decide to contribute $1,000 each to our children’s 529 plan in December 2018.
  • They would each get a $500 tax credit in January 2019.
  • We could gift them another $500 in January 2019.
  • They could put the $500 from the credit and another $500 in to the 529 in January 2019.
  • In January 2020, they would get another $500 credit, along with a $500 gift, contribute $1,000 to the 529, etc.  It just keeps flowing from there.

Over time, this averages out to a $500 gift each year results in the 529 plan growing by $1,000, which is awesome.  If 2 people take part in this, it’s an extra $1,000 in funds a year for our children’s education.

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